This is why we shouldn’t expect a financial return on social programs.

August 19, 2015

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You probably haven’t heard of “social-impact bonds,” but policymakers are already placing their bets on this complicated investment vehicle. Inspired by the market logic that can turn your risk into someone else’s reward, a social-impact bond is a financing mechanism that enables a private investor to front money to fund a government-led policy project, typically an experimental measure designed to shrink budgets. If it fails, it’s the investor, not taxpayers, who are on the hook, and if it hits the jackpot, the city stands to save millions. The city liberates public funds for more immediate needs; its investment partner gets a slim cut, based on the success rate.

This hot new scheme was recently introduced to New York City in a place that is conceptually about as far from Wall Street as you can get: Rikers Island. The city piloted a rehabilitative program for youth at the notorious jail with the goal of reducing recidivism through a treatment known as “moral reconation therapy.” Goldman Sachs, with financial backing from Bloomberg Philanthropies, fronted a loan of $9.6 million over four years. They did not directly control the program; the city contracted with social service providers, Osborne Association and Friends of Island Academy, much like many “public-private partnerships” between government and civil society. The main difference was a potential premium for the funder. Depending on how many future jail stays the therapy prevented, the city would repay Goldman with a modest return by funneling, through the intermediary organization MDRC, two future “Success Payments” of up to $11.7 million.

In July, the results from the independent 12-month evaluation were in: The intervention failed to cut recidivism rates by the desired 10 percent. Seems like a flop, right? And yet: The effort was hailed as a success. According to Wall Street’s spin, the real victory of the program was that despite the failure of intervention itself, the SIB model actually accomplished its central aim—piloting an unproven social program at no cost to taxpayers. The city—which launched the program as part of Mayor Michael Bloomberg’s initiative for “at risk” young black and Latino men—gained from learning what doesn’t work, and funders acquired valuable social-enterprise investment intelligence. This “failing up” sentiment was championed by Goldman and Bloomberg executives, hailing the venture as an “impactful” lesson learned about “implementing evidence-based approaches.”

First Deputy Mayor Tony Shorris commented in a statement to The Nation,“This Social Impact Bond allowed the City to test a notion that did not prove successful within the climate we inherited on Rikers. We will continue to use innovative tools, both on Rikers and elsewhere.”

The model optimizes government outsourcing, allowing private funders to capitalize on fiscal “efficiencies.” Dozens of SIBs have mushroomed in the United States and United Kingdom in recent years, in social welfare, education, criminal justice—basically wherever lawmakers seek to make costly services “leaner.” If you bristle a bit at the idea of a corporation getting a kickback from a therapy group for jailed teens, one might argue that by lessening the risk born by the state, entrepreneurial policymakers are freed to think bigger and bolder, maybe test-run reforms that taxpayer-accountable elected officials might shy from without financial angels underwriting the startup costs.

The evaluation by the Vera Institute concluded the SIB succeeded despite the program’s failure, because while it missed the target, the project overall “showed that it was possible for investors and government officials to consider and agree upon specific numerical metrics about what defines success.” On Wall Street as in Washington, that kind of “partnership” helps ensure that, as the Center for American Progress frames it, “the risk of wasting taxpayer dollars if the new approaches fail is transferred to the private sector.”

But to critics, this focus on risk and return is precisely the problem—they see allowing more social services, including caring for troubled youth, to depend on corporate largess as going too far in privatizing the state. What if SIB’s sink funds into poorly planned programs, or policymakers prioritize projects that yield short-term gains for quicker returns? And not all things can be financialized—try weighing the value of an inspiring classroom conversation against a test-prep drill, or the unquantifiable emotional benefits of a teen’s first experience with therapy. Indeed, the gains and shortcomings of the Rikers’ experiment aren’t clear-cut: On the one hand, the intervention ultimately failed to achieve its preventive benefits—at what cost to the teenage subjects of the experiment who wound up back in jail? Will the city now build on this lesson learned to develop a viable alternative? Who will fund that pilot? Besides, Vera’s analysis indicates that of the hundreds of youth who participated, “44 percent reached a programmatic milestone…associated with positive outcomes,” so many teens did benefit in some way, just not the way that counted for the bond’s “evidence-based” financial rating.

Despite the raves of the social-entrepreneur class, some have trouble squaring the financial risk of SIB’s with the potential indirect social risks of government by venture capital: Louis-Philippe Rochon, an economics professor at Laurentian University in Ontario, who criticized SIB’s in the context of austerity politics, tells The Nation via e-mail:

[S]ocial issues go beyond mere economics…. when dealing with issues like crime and youth behaviour, the variables are vast and complex; it becomes impossible to deliver a satisfactory “output.”… it’s not like building a car. There are social, economic, physical and mental health issues, family unit issues, and more.

The SIB pilot, however, wasn’t designed for that. The program audit wasn’t constructed to analyze factors like homelessness or domestic violence, and that’s rational, considering the need to track manageable outcomes through empirical research. But the kids at Rikers—living lives rife with brutality, poverty, and systemic racism—don’t grow up in the neat lines of annual profit projections. And it’s not Wall Street’s job to invest in such risky business as troubled youth, precisely because the government exists to absorb social deficits that the private sector can’t or won’t manage. When social policies fail, it’s likely not because government institutions take misguided risks but because they put faith in misguided priorities, at everyone’s expense.